Buffett, Trump, Banks and Super. May 16, 2025

27:24And it's a very good reminder to not read too much into the why of a share price. And it's very hard to do. You're like, oh, it's up. What happened? Or it's down. What happened? And like, often there's very clear, obvious reasons, good reasons for these kinds of moves. But also equally often it's not, right? It's just a nonsense. And it's very, I think you're right. Did the market overreact? Yeah. Does the market usually overreact? Yeah. Is the market often like just outright wrong? Yeah, it is. I don't, as I've said, I actually rub my hands together. That is the situation. I'm very against a perfectly calm, rational, long-term oriented market because my opportunity just disappears and it's all about me.

28:16So I'll make that point. The other one, a nice segue from what we were talking about before, we talked about reputation, right? In the context of CEOs and the rest of it. Well, the US has a reputation, right? And for the longest time, one of the great competitive strengths of the US of A was just a, it is a great place to do business with. They have a very clear, solid institutional and legal framework in which to conduct business. They're a very level-headed partner. They're not going to do, you know, 180 moves out of the blue, you know, and then change their mind a week later. It's like, that is exactly the kind of environment that anyone looking to do business in the US, set up business, or just trade with the US wants, I'm not going to invest goodness knows how many millions of dollars in setting up an operation just to be rug pulled at the 11th hour because of some arbitrary brain fart from a politician.

29:04No way. So even if things went back to perfectly exactly the same settings as they were prior to Trump, it's kind of like the direst cast now. But people are going to, hmm, I'm a little bit unsure. And it's not just people external to the US, it's people internal to the US. So we think, well, maybe I'm going to rethink my supply agreement with China. Maybe I'm going to start thinking, I mean, well, this is actually the design or the stated design is to get people to encourage businesses rather to invest locally and to manufacture locally. But again, even that, how likely is that given that things might be reversed?

29:41No one knows. I don't know. You don't know. No one knows. And there's strong opinions on each side, but that's exactly the point. That's the damage that has been done. And that is the damage that is very, very hard to kind of undo. So, yeah, it's kind of weird that the markets are doing what they're doing. I said to you before, the Aussie market's 3 % away from an all-time record high. It's the most bearish bull market I've ever experienced in my life. Well, that's the thing. It's all over the place. It's just you get big falls and big rises. And there seems to be – again, as you said, and we have this conversation regularly, there's one thing for the opportunists and one thing for our listeners who might be a bit worried about it.

30:17and that's sure yeah both both are true at the same time yes um which is just you know it's just going to reframe the thinking though yes that's a way to put it oh it's scary i was like yep celebrate it but also that's right exactly yeah exactly yeah no it's 100 we've talked about that a lot just separating the the the emotion from the actions really really important if you can the further you can get to feeling like this is this is okay this is good the better off you are. Yep. And let me say again, I, look, the ill-informed opinion of one random podcaster, but I, behind the scenes, I 100 % think Trump blanked first.

30:54I think he made a lot of proclamations and big statements. Yeah. Then the reality of the situation hit. Some diplomatic channels were open. Some advisors got in the air and, you know, Mr. President, this is how the world works. Careful what you do here because he's going to hurt. is going to hurt us more than it hurts them. Everyone, as you rightly say, no one's really benefiting from this. In aggregate, we're certainly not benefiting from it. But it's like, look, at the end of the day, we're going to hurt a lot more. If things break down between China and the US, like the US is in more pain than China is, I would strongly suggest.

31:31And I think that realization has come home to roost. And now it's all about trying to reframe things as a victory and then declaw, slowly sort of walk back from it and hopefully, you know, distract the masters with something else. I'm not sure that's right. Yeah. It just, they really are frenemies, the US and China. Like they are so intertwined and it's the structural condition that has been built up over decades. It's very hard to undo that. and nor would either party want to undo it entirely as well. So I just, I don't even know, man. This is going to be such a fascinating decade in terms of how the world reconfigures and realigns with all of this kind of stuff.

32:20It's, yeah, grab the popcorn because it's going to be wild. Yeah. Yeah. You know what's weird is I would be surprised if 10 years' time everything's radically different or radically similar. Yeah. And that's the uncertainty. I don't think we can necessarily discern a path. And this is, I will actually take investment point out of this because there's the doom and gloomers who are always predicting the next recession, next recession. I mentioned they're right. See, I told you I was right. And, you know, is it going to be a wild? Yes, by definition. Largely because Trump's, at least for the next three and a half years because Trump's in the White House, right?

32:55Where does that end up? Well, maybe we end up dramatically diverging from where we are now. Or maybe for all the bluster, you kind of go, huh, turns out that other thing was okay and we don't need to make that much change anyway and the political winds shift and maybe we're back where we started. And again, I don't have a strong view on either. I think that's, from my way of thinking anyway, my key point I think is I'm deliberately trying not to have a view on that because that then infects my thinking, infects my investing. And when you start making those binary bets of I'm going to go to gold because everything's going to hell.

33:24Now if it goes to hell, maybe I've done okay. If it doesn't go to hell, then I've lost a decade worth of opportunity. So it's a really difficult one, right? It's what do you, and we say regularly, what do you think and then what do you do? They're different things. I have my views on Trump. I have my views on tariffs. I have my views on a whole lot of other things. But the more extreme and more binary you'll bet, the more you better be right because the costs of being wrong escalate almost more exponentially than the benefits of being right. Just because when you go back to closer to zero, getting it back is much, much harder.

33:55Doubling your money or losing all of it, same dollar difference in both ways, but coming back from one or the other is a really different thing. It's why diversification matters. It's why, you know, I was going to say be conservative. I will say be conservative in the sense that be conservative in terms of your portfolio construction, but I don't mean conservative like go to cash. So be aware of the potential things to go wrong. Have that diversification. Have the kind of, what do you call it? Not the parachute, but just structure yourself so that if some things go wrong, you're not wiped out.

34:24Make sure you don't take those risks. Sorry? Resilience. Resilience. Great word. Perfect. Yeah, I mean, it totally is. I mean, look, here's the thing. The world has been through some pretty scary situations before, and things get very bad for a lot of people. But it's always good to remind yourself, even when you're at the most doomerish end of the spectrum and things are going to get really bad, and I find myself straying into that frame of mind every now and again, it is always worth remembering that, look, unless it really is end of days kind of stuff, it's like, well, life will go on. You know, people will still need food and shelter and medicine and even actually well beyond that, right, in terms of consumer goods and the rest of it.

35:06And there'll be share prices that move around and funding rates that shift and that. But there will always be reward for people who are creating value and businesses that are creating value in particular. And that's always my framing with the companies I'm invested in. It's not like, oh, nothing can go wrong with this. It's just like, well, there's not too much that can go wrong. And if it does go wrong, hopefully it's not existential. I think that's, you know, I'm very fond of the idea if you look after the downside, the upside takes care of itself. And it's, you know, we all tend to focus on the upside, right?

35:39It's like, oh, well, how much can I make? And, you know, nothing can go wrong. And it's just, it's backward kind of thinking. So, yeah, and you can play that in various ways. You can go to a hyper-defensive, full 100 % equity weighting, right? So in one sense, that's risky because shares are considered risk assets. They are risky.

36:02In another sense, particularly for a long-term investor, I think it's probably, along with high-quality land, about one of the safest investments you can make. Because they're real things. And I think whenever you go through situations like this, and we are a species that abstracts to the nth degree on everything that we do, it's when things get really gnarly in the financial world, it's the real things that you want to make sure that you own, right? You know what my view is on bonds. I think that is the reckoning that the world is going to face very quickly, particularly the US, is that these literal bits of paper that are backed by nothing other than a promise and has always been historically considered as the safe haven asset.

36:53That is what you do, right? Gold and bonds, move to that when things go wrong. I just feel as though talking about what Trump has done, undermining confidence. It's like, I don't know. I'm not going to buy a 30. I'm not going to give money to the US government for 30 years for 4%, right? Like when they're printing money like crazy and they're breaking every trade relationship under the sun. It's like that is absolute kind of madness. And I feel as though you might sit there with your textbook telling me that, no, no, no, US Treasuries are the safest investment. You're silly for investing in a consumer staples company on the ASX.

37:31But I think it's times like this that you really want to think from first principles and go through a second. Now, what is risk? Things get really bad. What would you rather own? Would you rather own some piece of paper from the EU? Or would you rather own a share in Woolworths? I'll take Woolies. Like, yeah, okay. I know it's more volatile. I know the historical context. And, you know, my view on property, you know, it's like I would rather have a piece of land in a good city, you know, than I would some, you know, abstract financial kind of contract based on the sovereign goodwill of an entity.

38:14It just, those are the things that I think people will have to rethink very clearly. Or am I being a bit too hyperbolic? Do you see what I'm getting at there? I know. I completely understand what you're getting at. I think you're 100 % right. And again, that's the benefit we have as individual investors. The bond market is many multiples the size of the equity markets. It's huge. And so if you're an institutional investor, you don't have the opportunities we have to buy our share in woolies. You're buying 5 % of woolies or nothing. And maybe you should anyway. But the retail investors, your favorite phrase, private investors, individual investors, investors just generally, Have an opportunity to be, and Buffett said the same thing.

38:55You have the opportunity to go and find the opportunities where the value and the risk are appropriate for your circumstances. The other thing I will say, mate, no, you're 100 % right, but I'm actually going to extend it further. You say I'd rather own Woolies than a bond. That's a very, very fair view. The other thing is you don't have to own just Woolies or a bond. You can own a diversified portfolio of 25 great companies rather than a bond. And so then the great misnomer, I've heard people on Twitter try and – I love it when people try and tell me about investing on Twitter. It's fantastic.

39:23No, no, no. So really, the risk premium is required in shares because otherwise it wouldn't be there. Yeah, okay. That's fine. Unpack that for me. Well, you know, we're talking about shares being riskier, right? Individually, they are. Over time, over a century, they've delivered way more than cash and bonds and property because they just, you know. And so it was kind of like my point was being diversified, long-term returns, blah, blah, blah. No, no, it's still risky because there's still a risk premium, therefore it's riskier. So it was one of those backwards kind of, you know, circular yeah the existence proved itself as opposed to being rationally provable right like well if unless it was there it wouldn't be necessary it's like well let's know how it works you know the saying is have fun staying poor which is a little bit mean but kind of funny as well it's like all right you you do you then yeah um i'll take some risk over here that's almost my point is the the risk we're taking and again here's the other thing is we We just, we get caught in binaries way too frequently, right?

40:19Shares or bonds. Now, I don't own any bonds. You don't own any bonds. I wouldn't sit here and buy any bonds. So I'm not going to say you should own both necessarily. What I am saying, though, is to your point, if you want to have some cash or some, God forbid, Bitcoin or gold or shares or property, then do the thing, right? But your point about having something that's real and tangible, and when we say tangible, people think tangible is it must be a physical thing and shares aren't a physical thing. Except they are. Right, exactly. But, you know, companies are real things. Some will go broke. There have been some famous bankruptcies.

40:47And if you only own shares in those companies, then that was as silly as being in bonds. You only lose 100 % of your money in bonds. So bonds are almost certainly less risky than the average individual company in the sense that the most you lose in bonds is the inflation rate. No, that's a coupon less your inflation rate, right? So it's, well, prices can fluctuate in the short term if you want to sell at a moment's notice, mark to market, blah, blah, blah. But realistically, you're going to get your money back in nominal terms with a government bond. Short of governments going broke, and they can, but they're probably not going to because they don't inflate their way out of it, as you've said millions of times, and print more money.

41:20It's really handy to be able to print your own money. Right. It kind of removes that risk of outright default. Right. So the downside with a bond is almost certainly, well, definitionally, other than Argentinian bonds and maybe Russian bonds. But, you know, a first world country, the downside is relatively limited in the context of, in nominal terms. And so, you know, Woolies could go broke tomorrow. It's probably not going to. It's almost certainly not going to. Other companies will go broke in the next year, stuff happens. So the absolute, and this is the problem that people make academically.

41:48You say, well, a company is riskier than a bond because a company can lose more than a bond can. Yes, that's 100 % true by definition. But then you think about the history, you think about the ability to diversify. Will the stock market go to zero? No. Okay, well then, and if we do, by the way, you don't get your bond money back because something horrible, nuclear war, third world war, whatever it is, things have gone really bad real fast. So yeah, you're 100 % right. You're a million percent right, particularly if you're diversified rather than a single company. You say, well, okay, what do I want to own?

42:16I too. The other thing is companies create value over time. And again, maybe this, because ASIC and they do the right thing and I can't make promises, I can't make absolute statements, so I won't, I can't. Is it possible we've reached peak capitalism? Yes. Is it likely? Hell no. And so if that's true, companies will continue to create value, incrementally grow. Probably the bond is you only get the yield back. There's no capital growth potential. by definition. Again, short-term market-to-market movements. The opportunity with shares is phenomenally large. That's why they've outperformed over periods of time because they create incremental value.

42:53It's just an easy decision for me too. And I've got to be careful with the wording here as well. Bonds is the biggest asset class, right? But there are so-called junk bonds and there are the grade A kind of stuff. There's corporate bonds, there's sovereign bonds. There's all the different flavors of the rainbow, you know, when it comes to bonds. And so within that, there are different degrees as well. It's just, I guess what I'm saying is it's just always worthwhile thinking from first principles, understanding what it is you own, why you own it, you know, what is the risk here? And I feel as though there are just some sacred cows that have been true for as long as living, when I say living memory, Like people who are alive and in the workforce today, there are some things that have happened in history that just seem like so distant and will never happen again.

43:47I feel as though that's when we tend to get into trouble is when the old group die out and the young guns come through and they've never experienced before. We're masters of the universe. We're not going to make those dumb mistakes, but they'll create their own dumb mistakes. And it's always that point of maximum hubris. that there is the greatest risk, I think, in the system. Don't know if you read Dalio's piece recently. He published it on all the usual platforms. But he was just making the point. It's like, the last 100 years, the US has defaulted twice. Right. The United States, not Brazil, not Lebanon, the US of A, twice defaulted on its obligations, right?

44:32Once, just before, I was going to say in our lifetime, but not that long before you and I were born, they did it, right? And it's, again, I'm not trying to sort of say that, oh, the world's going to fall on our heads here. Other than just, I think we need to think, investors need to think through things for themselves a little bit. It's always scary when people just go, for me, the classic is the 60-40 portfolio. Yes, yeah. You know, which is, what is it? 60 % bonds, 40, no, sorry, 60 % equities, 40 % bonds. Why? because someone came up with that in 1962 and it's just been seen as like, well, that's the appropriate balance between risk and return.

45:13Standard fare and conservative and lots of stuff. Yeah, exactly. And it just, you get these things that, as soon as you're investing, did I say unvesting? Yeah. That's a good word. I might play with that. If you're investing purely on soundbites and it's scarily common how often that is, I just think you are setting, you might be fine. and a lot of these truisms quote unquote are true for a reason because they've generally been true but it's it's like the turkey story um which i'm very fond of you are we like tell us tell us the turkey story you know it's just the i forget i forget who said it originally but it's it's it's looking at risk through the lens of um one-time existential events and so it's it's given through a metaphor of the turkey, you know, he's living his best life in the farm.

46:06All the other animals are saying, you've got to be wary of this farmer. He's not a good dude. He does not have your best interest at heart. And the turkey's like, what do you mean? Ever since I was a chick, he's kept the foxes away. He's got me vaccinated. He's fed me. He's kept me dry and warm. This guy is a good guy. My entire lived experience says nothing other than this guy is a good guy. And of course, Thanksgiving rocks around and the farmer comes and chops their head off. And it's just boom. I think it's from one of Nicholas Taleb's books or something like that. But it's just, it's a, it's a great way of, of being careful not to frame risk based on past experience and particularly just your personal past experience.

46:49I'm hesitating a bit here, but honestly, I do, I do think a lot of Australians are suffering this problem in regard to property, because again, you could be in your 50s and your whole life it's nothing except gone up been very very non-volatile very high returns very great asset you go and it's just easy to extrapolate that forward going well it's always done it so it always will i'm not saying it can't but it's just like it's dangerous thinking if that is the reason if that is the logical basis of your thesis it's just extrapolation can be handy but it can also be very dangerous when when it forms the the foundation for all of your thinking.

47:27It's just like, well, it's kind of always done that. Now, it's probably a good bet when you're trying to work out if the sun is going to rise tomorrow. But history is full, full of events that just, you know, it was this way for a thousand years and then one day it wasn't, you know. First time for everything. And there are always events that seem small, you know, whether it's the execution of Prince, was it, Frederick Ferdinand that kicked off World War I or I don't know, There's a thousand examples. You know, like the world has come scarily close to nuclear annihilation at least five times, except for the quick thinking and courageous thinking of a few individuals who just happened to go defy protocol and not launch nuclear weapons.

48:12Like it's like things, things really, we live in a world where I think we think a lot of things just exist on a continuum, but there really are binary outcomes that are out there. And I just, I guess, what am I saying here? I guess when it comes to investing, you've worked very, very hard, dear listener, to save up some money. And you're trying to build a better future for yourself and your family. It behooves you to think through things more deeply than just regurgitating a hackneyed old phrase that just sort of sounds good but isn't based on any logical thinking and lacks any context in terms of the current scenario here.

48:49I think you really just need to come from the most basic perspective you can and just sort of say, well, what is it that I'm trying to do here? What is the best thing that is going to do this for me? Why would this do it for me? And you need to ask a bunch of questions that are going to sound really dumb and almost embarrassing to ask. But I just think that's so much better than just going along with the familiar because the familiar is cozy. And you might be fine. But as I say, for me, the biggest example of this out there at the moment is US Treasuries. And put it this way. Put it this way. When the Fed inevitably starts buying, because China is going to not be recycling too many funds back into that.

49:32Why would you, right? It's going to be honored. Those bonds absolutely are. But with funny money, almost mathematically and certainly. And it's just, I think there's going to be a very rude awakening for a lot of people who have put their faith in these so-called low risk assets. And if your financial advisor or your planner is thinking of doing that because they want you to be safe, I would just, I would push back a little bit there. Nice. I mean, let's, speaking of bonds and speaking of yields, let's talk about banks for a second. Because we had Commonwealth Bank out this week, the last of the big four to report this earnings cycle.

50:05A pretty good set of numbers in the end, I thought. I'd say pretty good, pretty good given where the other banks are, where Commonwealth Bank has been, which is damning with faint praise, I suppose. Profit was up 6%, which is not too shabby for the largest bank in a case where the big four pretty much are the entire system. So you're only going to grow at system growth, plus or minus market share effectively, market share changes, that is. I came on the back of, I think this is right, the other three of the big four, one was down 1%, one was flat, one was up 1 % or roughly. So we're talking about a banking sector that's pretty flat.

50:36CBA, to its absolute credit, and I wouldn't buy the shares, but as an operation, has managed to get a pretty decent growth in profit out of what is otherwise a really tough situation with low revenue growth and high cost growth is a really, really bad mix. And so when you've got inflation in your, we'll talk about monetary inflation, but when you're inflation in your cost base and you're not making more loans or making effectively delivering more revenue, you've only got one way for your margins to go. So CBA has managed to hold their margins roughly flat, profit up a little bit. I thought overall was a pretty good result.

51:08But it does kind of go to, I think, mate, where we are sitting in the Australian banking sector. And I suppose there is a reason to think about, I love index funds, I love low-cost, broad-based index funds, everyone knows that. But when the banks are really big and pretty stagnant, there's not much underpinning the potential for growth for the ASX or the All Orders. Nope. I can't wrap my head around it. at all, like in terms of, again, there's two things here. There's the shares and then there's the business. Yes, great. Business, given everything that's happened, perfectly decent result and relative to the average and the sector, an outstanding result.

51:48Yeah. But, you know, you're getting a less than a 3 % yield on this thing. That's the other thing, right? And you're paying 27 times earnings for a business. Okay, 6 % growth is nothing to sneeze at, but you've got to assume that they're going to, as already the largest player, are going to continue to steal market share. And again, history is useful here. It ebbs and flows. But you will not find an example in this sector with these players where one has just consistently just taken and taken and taken and taken and taken. And maybe that can happen. Maybe that can happen and they can just continue just to steal and grow to 100 % market share.

52:24But you want to kind of hope that's going to happen or something like that or they find another business line because it is just priced so excessively here. And in a way where it does give you a very binary outcome here, it's kind of like, yeah, no, we muddle ahead and nothing really goes too bad. They continue to win share and somehow outpace industry average growth. And, you know, okay, cool. You might get a 7%, 8%, 9%. Let's throw in franking credits because we should. You know, you get an adequate return, not a great return, not an exciting return. A mediocre return is your reward for that happening.

53:04and there's good arguments to suggest it might not happen in terms of the business. But if it doesn't, like, again, I'm not trying to say this is going to happen, but I keep making the point because, again, it hasn't happened in our lived experience. Like, if there is any kind of banking crisis or recession or anything like that, banks are the worst, always the hardest hit, always. And it's like, then you've got a 50 % downside. It is the exact opposite of what I look for in an investment is asymmetric outcome, but not in a favorable way. heads I win a little bit, tails I lose a chunk. Like, nah.

53:37Yeah, I think that's a pretty way to put it too.

53:42The only thing I want to add, I'm interested to round out the conversation, is there is a chance that the PE continues to expand because investors keep paying more for it. And so that's, you know, it was expensive at 20 times, expensive at 22 times, expensive at 24 times earnings. Yeah, yeah. The price can go up, the PE can stay high, the market can do whatever the market wants to do over the medium and short term. Long term, that's likely to, but it's possible because investors keep paying more for it, they keep paying more for it. You know what I can't get my head around, mate? The PE of CBA, I'm just using the Google Finance numbers because it's easy, I've just got them in front of me, is 27 times earnings for CBA.

54:14For ANZ, it's 12.8. Now, I'm happy to accept... There's probably a one-off in that, though, surely. Well, no, because the NAB one is only 15. So NAB is 15.4. Westpac is 15.95 even take the highest one at Westpac the CBA is still 80 % higher than the Westpac 6 % higher than the Westpac and I just look at that and kind of think even if CBA is the best bank mathematically the degree by which they'd have to be better to justify that premium is extraordinary and it's not I find it I'm not saying you should buy Westpac or CBA. I don't say you should sell either of them. I'm just saying if I was going to buy a bank, I'd love to have the...

55:03CBA is the best bank. It is the best bank in that four demonstrably, at least in history. And right up until this week, they are doing better. But to your point, you have to believe they can keep outgrowing the others by a very significant stretch for a very significant amount of time for that to start making sense. Yep. Yep. I don't get it. I mean, I'm happy. I've been so wrong on the banks for ages, but I'm just happy not to do it. You know, it strikes me as a, it's similar to the friend you've got that smoked a packet of cigarettes their whole day, every day of their whole life. And you're in the nursing home together and they're 90 going, see, it's fine.

55:44Yes, it was. You can't argue. You can't argue against the facts. I did all of this and I was fine. But then the next step is, therefore, this is not bad for you. And it's like, well, it is. It's just that you got lucky here. And I think that is the situation I take with a lot of investments, really, which is just sort of like, yeah, there's been no calamity, but I'm still happy to have not participated in it because there are parallel universes out there where it went very differently. And it was really just through the good grace of God or some higher power that it didn't sort of happen. And it just strikes me as an incredibly precarious situation.

56:23And I'm just, we are, as we often say, we are in a probabilistic game. Yes. And the probabilities aren't great, you know. So I'll just, does that mean that, you know, does that mean that I can't lean on it? No, you could probably buy it today in 10 years' time. You look back and go, ha, ha, ha, I outperformed the market at 12 % compound return. The PE is now 47 and they continue to steal market share. You guys are idiots. It's like, yeah, potentially so. I don't deny that that could absolutely happen. But what are the odds of that happening? And if it doesn't happen, what's the downside? That for me is something I'm happy to miss.

56:57One other thing on the, which you called out off air, which I thought was a good thing with the results. It looks like a bit of the driver of the returns here was an increase in business lending. Yes, yeah. Which I was really happy to see just from a nation standpoint, because if you look, I did the numbers a year or so ago, but when you look at the loan books of the banks, It's like 70 % to 80 % residential housing, which is so depressing because we've created a lot of money to put into the house prices, which just doesn't have any productive value and actually doesn't create much wealth because everything goes, as we've talked about a million times before.

57:34Business lending is different. That has the potential to improve our standards of living and our material well-being. And I would argue that that is a far more important civilizational duty of banks to provide credit to businesses and productive enterprise because it makes us all better off as a result of it. Printing up a bunch of cash and chucking that into a housing price, it benefits the early movers and no one else. whereas stimulating business investment is something that can potentially benefit us as a country in terms of jobs growth, in terms of material well-being, products, new services.

58:17It's a great thing. And I shouldn't be celebrating it too much because we're still really talking about a minority of their business activities here. But it's good to see that we're starting to see a bit more focus in terms of business lending. Yeah, I agree. By the way, it also just diversifies the bank's own balance sheets. Again, yourself, if you're a bank shareholder, you want to be exposed to more than just three quarters housing, right? And you're right, it's not that big a difference, but any difference just means you're a safer banking operation. I kind of, I mean, I get why, if you're a banker, I get why you want to lend against a hard asset rather than lending against a business that may fail.

58:51Like, we just talk about, you know, risk and return and that kind of stuff. And, you know, it depends what the return you're getting. I can imagine if I was a lender, I'd be like, well, if I could repossess that house over there, that'd be great. I can't repossess your idea to build a computer company named after a piece of fruit, so I'm probably not going to do that one. Now, in hindsight, that would be the better deal, right? But it is difficult. It's probably the wrong word. But it's just one of those. There is a justifiable reason why they'd want to. The problem is the result of that. I don't know, not even the direct result.

59:17But what's come along with that is high house prices, very concentrated banking sector. And as you say, money not being lent to those businesses that can actually add to the productive output for the country. And it's, yeah. I mean, it makes sense in isolation, right? Like a lot of the arguments in 2007 as to why these collateralized debt obligations are perfectly fine and you need a Six Sigma event, which is just a fancy way of saying a very statistically low probability of anything bad happening, was actually all kind of true in that kind of context. Because you go, well, you know, even if so many go bad, the rest don't, we're okay.

59:52But when you get these systemic kind of constructs, it's different. Don't forget that the very thing that you're pumping acts as collateral for future loans, which you lend against, which makes the collateral go up, which allows you to lend more. And it just sort of, you get leverage on leverage. And it's one of those things. So in isolation, oh, that person over there failed to pay. So at least I've got this hard asset that I can sell. True. But can you sell it at the carrying value? can you sell it at the value that the loan was calculated on in it without any without any you know uh sector-wide issue probably yeah but but when everyone rushes for the exit at the same time and and a of course a bit of panic and b because they have to because people are forced sellers and banks need to recoup their money and they're forced sellers as well things get very very bad and again it's just i know i know i know people probably rolling their eyes here i just i'm not you've got to separate the I definitely think this is going to happen and it's going to happen tomorrow from this is really a non-zero chance.

1:00:55And when I say non-zero, it's not like 0.0001%. There's a decent chance that this has happened and it's happened many times in my adult lifetime around the world. This feels like it's such a massive blind spot. So to have these insane valuations to effectively buy a leveraged – what am I buying here? I'm buying, I'm basically buying a leveraged bet on Australian residential property. That's what I'm doing when I invest in, in a bank. And it seems like for an asset class that is against any measurable fundamental value, historical context, you name it, is just exceedingly eye wateringly expensive.

1:01:39It just seems reckless. And, and it, you know, I was just saying how risky bonds are probably not as, risky as uh australian bank shares at this point in time and as i said i interviewed alan kola a few months ago as well he called it a bubble the banks a bubble i thought he was surprised floored me a bit for him to use such strong language i mean obviously i agree but it was this sort of like and it's funny too like the more you speak to people even in the industry it's like oh yeah it's insane oh yeah it's insane and it's just sort of like it seems to be a very widespread it's not in like a niche view and yet and yet here we are so it's it's wild man it's i'm really happy to watch it from the sidelines and and not you know you can't stop folly but you can choose not to participate in it that's fair that's fair uh but let's finish off just i always think when you go good point and move on i think you don't disagree you don't agree no no i don't i don't i don't i don't agree as strongly as you do uh i have i don't i share the view as strongly as you have it.

1:02:39I think largely for reasons of, well, valuation, absolutely. The leverage about the house prices thing, you and I have talked regularly about, and you and I flip-flopped between the Pollyanna and the realist from time to time. And the cynic. We go sometimes in that direction. I don't suspect there's a world in which house prices are allowed to fall meaningfully for any standard period of time, short of government being literally unable to stop that happening. and that's a possibility. I just don't suspect the risk is as bad as if it was allowed to operate without intervention or support from a government.

1:03:17Oh, you'd 100 % be bailed out. Yeah, 100%. Everything will be thrown out to stop it from happening. Interest rates fall or whatever. Again, you're not wrong about the circumstances. Again, we've mentioned the Steve Keen bet a lot of times. I would have been right except that this happened. And I was like, do I think there is some objectively way too risky lending being done on assets that are way too expensive based on people's ability to repay? Absolutely. Would I love to change that in a million different ways? Yes. We've talked about ways we could do that before. Do I think, though, that – are the banks as risky as they would be if the government wasn't already predisposed?

1:03:52Again, a government, not the current one. I don't mean it politically. Both, well, we saw the last government, they dropped the lending buffer, right, to support lending during COVID. So, you know, I suspect... Yeah, so I'm just not as... I wish I was more concerned, because if I was more concerned, it would mean that things were working properly. I just, I don't suspect the risk is as big as you think it is in terms of the risk of permanent capital loss. The risk of underperformance is absolutely paramount, particularly for CBA. I've got to say, I look at ANZ and think, I don't know how much cheaper it needs to be before I'd be interested, but at 12 and a half times earnings, you're right.

1:04:29Maybe there's one-offs in there, but if there's not, I'm kind of like, well, you're getting a 5.5 % dividend yield. You gross that up to, what's that, seven and a bit? Again, it doesn't mean shares can't fall, but that's a pretty good starting point. And then you put the capital change, the share price change on that over time. I don't know. I'm not going to recommend buying it. I haven't recommended buying it, but I don't know that I'd run screaming from the room if I was forced to buy some. CBA would be a very, very different thing because the PE is two and a half, almost two and a half times, which is bananas for a business that's effectively the same company with a different color scheme.

1:05:01Yeah. No, that's fair. That's fair. I guess it's more, maybe it's part of my echo chamber more than anything else, but it's just, it seems, at least anecdotally in my direct experience, it's like whenever you speak of anything, and I'm not even talking about like doom and gloom, outright disaster scenarios. It's just like anything that's less than super bullish is sort of like always, always met with like raised eyebrows. Like, what do you mean? As if it's a rule of the universe. It just, it makes my spidey senses tingle a little bit. Whenever you have a nothing can ever go, and you're not saying this, but when you have that view of nothing can ever go wrong, it just, it's usually the point at which things are about to go really horribly wrong.

1:05:47And it just, it just makes me nervous. And I just, again, I just, the asymmetry of the whole situation just strikes me is just reckless, to be honest. Yeah, and I completely agree with that. It's not a case of should it be done or is it appropriate or anything else. I don't know if the outcomes are going to be as dramatic as might otherwise be the case if it was allowed to find its own level. Isn't that depressing? That's also depressing because when we say we won't allow it to happen, you kind of think, well, what do you mean? How do you stop something like that happening? It's like you can't.

1:06:18Well, you can on paper, but you can't. And you keep getting down the road. There's a bit of, yeah, yes. It will have very real consequences, just not maybe the most immediate in terms of prices go down significantly now. It's just sort of like, no, just in far more insidious and long-lasting kind of ways. So anyway, as I say, I'm glad to be watching from the sidelines. Yeah, that's the other thing, right? You don't have to play the game. No. Let's finish quickly, mate, with just a touch on the$3 million super stuff we talked about last week. And I wanted to just talk about it again very, very briefly.

1:06:57We've talked about the stupidity of the tax and its implementation and all that kind of stuff before. The papers are full of stories of people panicking, in their words, before June 30 to try and change the super arrangements. Now, if you're listening to this, you've got more than$3 million in super, you've got some very, very good problems. But potentially what we're hearing, and again, who knows what's going to happen, there's a massive rearguard action being fought by a whole lot of people. Allegra Spender's been out there, the independent member for Wentworth. The Liberal Party, Tim Wilson, re-elected, we think, at the time of recording.

1:07:27It was 328 votes ahead of Zoe Daniel. In Goldstein is full-throated against this one. Jeff Wilson, the fund manager, no relation to Tim as far as I know, is out there with the same story. The challenge is, we're told, the government may legislate it in August, but legislate it for the year beginning July 1. In other words, slightly retrospectively. and so there are people who are like well i don't know what that means i don't know what that means if i super know what i should do about it and i just thought we'd kind of touch on that a little bit mate i don't know if you've got any particular thoughts but i mean again it's my vast bulk of our listeners as much as they're very wealthy and reasonable people won't have three million bucks in super um but if you're in that boat you're going to be charged 30 tax on your your earnings above three million dollars in theory on unrealized gains and then it's not going to be indexed so more and more people are going to get caught up in it.

1:08:18If you're already there, if you make positive gains every year, you get further and further and deeper and deeper into that. Now for detail, just to remind people, the 30 % tax is only levied on the amount above$3 million and the same with the unrealized gain proportion above. So the proportion of the asset, but if you've got a$3.5 million house, a investment property, just to use a large example as a single asset for the fun of it, if that goes up to$4 million, you're going to pay tax on the first part of the gain at a smaller amount. It just has really complex and really messy real fast. So the current people say, well, what do I do?

1:08:50I've said before, mate, my strong suspicion is Labor have introduced this as a de facto cap on super. I think they have every intent for this exact outcome, which is sell your assets, keep your super under$3 million, put the money somewhere else. But we've also seen reports just to kind of be a little bit careful about how much you do run away with. Because again, let's say you're something worth $3.1 million or$3.05 million. If that goes up by 10%, the amount you're going to pay the 30 % and the unrealized bit is only on the extra$50 ,000, the increase. And we're talking about tiny, tiny, tiny proportions of the total gain is taxed that higher amount.

1:09:24So it's stupidly complex and ridiculously designed. But there is some argument to say, well, I don't want to pay more tax than I used to, obviously. But if I take the asset out of super, I pay capital gains tax on the asset. When I sell it, again, it reduced rates inside super, but still not at nothing because some under the pension threshold is free, but anything above that is not. And then you've got to reinvest that money somewhere in your own name and you've got to pay a higher tax on all of that. If you're selling a single asset, you sell the entire$3.5 million asset. Now, maybe you only take some money out, leave the cash in there or reinvest it in shares or something else.

1:09:54But it's just a real mess, mate. And I guess my general thought, we're not giving you tax advice here. We don't do that. But people should tread carefully. It is big and it is scary and it's stupid, but it's not as big as you think. It's probably not as scary as you think. And the tax implications are probably not as big as you think based on the likely implementation of this. The big risk for me, if I was in that situation, and frankly, I'm not, I wish I was, is that we don't know whether it's going to be imposed retrospectively. And so people are, I think it's the most rubbish part of a very rubbish tax plan is that retrospective bit because I can't imagine a good scenario where any law should be applied retrospectively.

1:10:35If I follow the law at the time I did the act and then you change the law, I should follow the new law. you can't tell me I should have followed a law that didn't exist at the time. But if it happens, people are kind of being forced to consider what to do with their money, their super, in the next month and a half. Yeah. It's a complete mess. I mean, again, I've got to separate the intent from the execution. Assuming the intent is what they say. Yeah, yeah, that's true, yeah. But, yeah, so I'm not against, I think preferent, what's the word advantageous treatment of very large balances probably is not needed the whole reason to have advantageous treatment is to incentivize people to save for their retirement that's why we do it it's like but once you reach once you reach a certain point it's kind of like good job done why do I need to incentivize you to to do that you're already you you won here's your trophy you're gonna have a great retirement oh but I still need to incentivize you to do so So, yeah, that's dumb and that needed to kind of change.

1:11:35I agree with that. But this is – but, yeah, the implementation is an absolute mess. And I really don't have a lot to say on it other than it just – it's despair, really. I just – I think the accountancy practice industry is going to be fantastically excited about this because there's a lot of advice that needs to be done. There's a lot of restructuring that needs to – I'm not even being cynical here. It's just like, why wouldn't you, right? It's like, you know, this is my job and now there's more demand for my services. So like, I'm not saying you shouldn't be happy if you are an accountant. And you're like, yeah, of course.

1:12:06Like, you know, the person who sells umbrellas is really happy when it rains. And there's not a value judgment on that. But it's hard to see too many other people sort of winning in this. So yeah, it's just probably a good intention, just very poorly executed, very poorly communicated, which tends to be the way we go these days. Let me ask you a question, unfair question. if you were in that if you had 3.5 million dollars in super now would you change anything before June 30 no given given specifically the uncertainty as opposed to knowing what's actually going to happen because we don't know what's going to happen yet well for me to have that much in super it would mean an incredible capital gain so Bitcoin will have you there this time next year won't it yeah probably by November yeah I don't think so I think often when you're in doubt, sometimes the best course of action is just nothing.

1:13:04Not always. Sometimes when in doubt, get out. It's also a good saying. But in this particular situation, I don't think I would. But I would probably speak to my accountant to get some advice from someone who knows it. That's the only advice. If you're in that situation, you can afford the advice anyway. You shouldn't have to. The government should be more reasonable and not make a retrospective so at least people have the choice of knowing what's going to happen before they have to make that decision. It's just dumb to do anything different, but there we are. I'm with you. I have to say, for the first time, and I'm not going to retire with$3 million in super, but if you're 18 and you're getting 12 % of your salary put in super for the next 40 years.

1:13:45Oh, you're absolutely going to have more than$3 million. And so you're indexed, right? So for the first time, I would encourage people to consider investing outside super more than inside super with voluntary contributions. I've been saying that for years, mate. Not entirely. Yeah. Not entirely because you want to – well, if you're 18 and you're earning$100 ,000 to start with, you're probably going to have more than$3 million by the time you retire anyway. So, yeah. The thing is, though, don't forget the concessional tax treatment while you're in super is still worth something. Oh, yeah. So, you've got to be careful with that.

1:14:15Part of the reason you'll get to the$3 million is you're being concessionally taxed. So, you've got to be a little bit careful. I'm not saying don't contribute anything to super at 18 because you'll save going over that cap at some point in your 50s, but in that next 30 years you'll pay a truckload more tax than you would otherwise. So kind of care for what you wish for. You don't want to have less money because you've paid more tax in the end even though you try to avoid paying a higher tax in super. So that's always the problem with super is it's even with this new tax it's still concessionally taxed.

1:14:40You're still better off to be in super over$3 million and outside it for the most part except the unrealized gains debacle. So it's still a it's a more finely balanced question than I think it used to be. And certainly if you're a high income owner later in life and you kind of can do that trajectory for yourself, it's good to think about where to do it. But again, just a reminder, don't, we don't want to pay more tax than we have to. I get that. But you will find, particularly if you're a high income earner, you're probably going to pay more tax outside super anyway than inside super over$3 million.

1:15:13So even if you've got more than$3 million, it may still be the best strategy as long as you've got the cash flow to leave it there anyway. And that's why, speaking to the accountant, it's important for these people now. Even if those adding to super, it may still be less worse than having your own name. So just, just, just be careful. I think that's, I think it's an excellent point, but, but I've always, particularly for younger people, it's different if you, you're within sight of, of retirement, but I just, I have a very high conviction that the rules will shift. If you're an 18, right. And you've got 50 years before you can access it, probably 60 by the time they increase the age, it's just going to change.

1:15:50It's going to change significantly. and probably not for the best. There's a lot of uncertainty that's there. I mean, when I was introduced, you know, there was for a lot of people, there just wasn't enough time to accumulate much. You know, you needed extra incentives. You're putting 12 % of your income aside for your entire working life. You're probably going to get there and be fine. I like, I just put a decent premium on control and flexibility that I have outside of super. I'm already contributing to super because all my, you know, there's the mandated contribution that goes in there. So I'm not doing it.

1:16:28I have to do it. But let's say I have a pretty good run. Let's say the good run continues.

1:16:41I want the flexibility and optionality to either enjoy that, spend it, to do what I like with it. there is something to be said for that. And I get that if someone, I don't know how you do this, but you can guarantee that nothing is ever going to change, then we're having a different conversation. But it's not even hypothetical. We've seen the rules change. We're talking about a rule change right now, right? Right now. And I just, for me, particularly if I was 18, I'd be pretty content with my 12 % mandated contribution and I'd be investing the rest outside of it. And that is totally antithetical to what every financial planner would tell you.

1:17:19And they're right to tell you that based on the rule set as it is today. But things change. And I think it's a very, very good case to be made that rules will change and they'll become more onerous. They're not going to change for the better, in my view. I think that's true. I'm still less cynical than you in the sense that between now and then, you still may be better off doing it. A time at which the rules for super are less attractive than not inside super, I think is a very long way away, if at all. Will the tax burden increase? Maybe. Will the rules of what you can invest in change? Maybe.

1:17:52Are we likely to... If I was 18 now, I would invest still some outside super. But I would suspect over your working life, you're still better off to have invested in super than not, even if the rules become more onerous over that period of time. I find out to believe there's a circumstance in which you say, gee,$100 kept outside super would have done better than$100 inside super over the next 45 years. Yeah, that's true. but there's also there's also the i i want to enjoy it yeah do i have to wait until i'm 73 like flexibility i completely agree with you on i'm 50 this year and that seems like forever away to me like let alone if i was 24 so it's it's not just the unknown unknowns of any rule changes but it's just that the and i'm saying not saying don't do it you're doing it anyway it's just that i i think that the the person who sacrifices and you know maximizes the voluntary contribution at a very young age, I think you're, I would just be trying to live a very, very healthy lifestyle and optimizing for longevity because, you know, life is to be lived.

1:18:55Money has utility, you know, and it's just like, I'm all for maximizing returns. I absolutely am. But I, at the same time, I don't live in a cardboard box under a bridge and eat two minute noodles, which I, which I should do arguably if I really wanted to maximize returns, but every sacrifice everything into super. You can get to my OPEC and what's the word for it? Hyper-focused on optimum return

1:19:25scenarios. And what I can tell you just from lived experience is all the best things in life don't fit in the spreadsheet. They just don't. At some point, I mean, if you're 18, you want to buy a house for a good luck. That's never going to happen. But at least you'll have half a chance if you've got some money invested outside of it, right? That's another point worth making, don't you think? Yep, 100%. I don't invest money outside super for any regulatory concern. Maybe I should, but I don't. But the money I do invest outside super is absolutely for lifestyle options. If I want to go and do whatever in five years' time because I can't touch my super but I want to spend some money, I want to have the money I want to spend.

1:20:01A million percent, which is why I do both. I just want to separate those points out from the quality of life from the regulatory potential. I agree with you. I think I'll probably keep messing with Super. I can't see a time which Super is worse than your own name from that perspective. But having to wait is 100 % a problem. I guess it's a problem that will brew and percolate for many, for a good decade or more. But on a pre-recorded podcast that hasn't been released yet, we sort of waxed lyrical about the structural budget deficit and the path that we're on. There is a scenario, pretty obvious scenario, if you just extend that forward where it's just like, there's a honeypot that is so massive that government will not be able to resist it and probably won't have a lot of options to resist it.

1:20:45And they'll dip into it. And, you know, it will become something for your retirement for the country very quickly. And maybe not, because maybe we veer off and maybe we become really fiscally responsible. Gosh, hard to say that with a straight face. But, you know, maybe we do. And if that's the scenario, then, yeah, you probably do want to maximise for super. But I just, I'm a little cynical on that one. You really, really are. That's all we've got time for, mate. Let's wrap this one up. Will you come back on Sunday? Yeah, hell yeah. Awesome. Until then, have a great weekend and fuller. Cheers.

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